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Nasir and Matt discuss a rare win for California employers and when they can seek expense reimbursement for voluntary employee training.

Full Podcast Transcript

NASIR: Welcome to our podcast where we cover business in the news and add our legal twist.
My name is Nasir Pasha.

MATT: And I’m Matt Staub.

NASIR: Episode 253. This is a monumental episode. I think it’s the highest episode number we’ve ever done.

MATT: I don’t know. It could be.

NASIR: I think so.

MATT: You’re just saying that because I’m recording this from a plane, right? Physically, the highest I’ve ever been up off the ground.

NASIR: Altitude-wise, it’s the highest.

MATT: Yeah.

NASIR: Correct, exactly.

MATT: Definitely 253 is the highest number-wise because we record going up. But, yeah, I think altitude-wise, this has to be the highest. But we’ve actually evened it out because I think you said you were in Death Valley recording this so I don’t know. Who knows?

NASIR: So, two milestones, definitely put it in the books.
But, today, what are we talking about today, Matt? Give us a little taste of the topic here.

MATT: People may not have listened to this before or might not be in California or experienced any sort of business or competition in California. The general idea is any sort of restraint against competition – I’ll use the word “competition” generally not enforceable and we’ve talked about different ways where, you know, it can be considered that and with trade secrets, you know, things like that.

NASIR: Yeah.

MATT: We had a decision – and this was end of January here – that kind of changed this a little bit. Let me just get into kind of the facts behind this. I’m just going to abbreviate. UPI is how they abbreviate it but USS-POSCO Industries, they faced a vacancy in this certain type of skilled worker that they need – if someone really is interested, maintenance, technical, electrical MTE workers. Here’s what they did; they needed to find these people. It’s a highly skilled area so they needed to train these people which, generally speaking, if you have employees and you’re going to train them, you have to compensate them for that.
This program they created, 135 weeks of instruction, 90 weeks of job training, and 45 weeks of classroom work – pretty substantial. Cost was also pretty substantial; $46,000 per employee that they estimated this program cost.

NASIR: Geez.

MATT: It’s pretty significant. I mean, I think that’s higher than the median family income in San Diego last year which is crazy.
During this time, the employees still got paid their regular wages. This was kind of in addition to train them, I assume, for this higher level or more technical side of it. If they completed the program, they would be assigned to this MTE vacancy and that was that.
But the thing to keep in mind here is participation in this was voluntary because they still had their normal position, but this would be a higher skilled position where I assume they would get much higher pay than they did before. I don’t know the exact numbers but I think that’s safe to say.

NASIR: Do you know if the training was while they were working or was it outside? The reason I’m asking is because you mentioned, generally, if you’re training an employee, you have to pay them – unless, like, there’s a four-factor test, right? If it’s voluntarily, if it’s outside of regular work hours, and not directly related to the employee’s job, and that the employee doesn’t perform any productive work during that. It’s a little ambiguous about that but it seems like these guys did it during their employment and they were paid their regular wage. And so, really, the main factor we’re talking about here is that it’s voluntary. It may not have been enough to not pay them for that training time but we’re talking about something a little bit different here.

MATT: No, and that’s a good point. That’s why one of the important things to see here is that it was, in fact, voluntary and that’ll come into play later. But another thing that was voluntary for these individuals are if they voluntarily left UPI within 30 months after completing this full training, they would have to reimburse the company $30,000 of the expense of the training less $1,000 per month of subsequent service at UPI. Basically, what this company was doing was saying, “We’ll pay for the estimated $46,000 in expense it’s going to cost to train you but, if you leave within this timeframe, you’re going to have to pay a chunk of this back.”

NASIR: A max of $30,000 but then I guess it goes down each month that they’re still working there.

MATT: Right. So, the individual that’s involved in this lawsuit, he completed the program. Two months later, he resigned. And so, they said, “Well, you owe us the $20,000. That’s what you agreed to.” That’s when the whole famous 16600 B&P section of California came into play which I mentioned at the beginning of this. I broadly said non-competition but it’s more than just that.

NASIR: I’ll read you the applicable provision as you listeners at home think about for a second how this relates and see if you can kind of get the idea. The relevant part says: “Every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.” And so, at first, all of you should be thinking about non-compete, right? We’ve talked about it a hundred times. In fact, we’re going to talk about non-competes this Wednesday but think about this as a non-compete provision. How does that apply to reimbursing for training? The idea is that, okay, if you have this provision that, if the employee leaves and they have to pay upwards of $30,000 then that in itself may be a restriction of trade that they’re pretty much indentured to work for their employer until that debt is basically paid off. If it’s $1,000 per month, what is $30,000 divided by 12? How many years is that? About two and a half or so?

MATT: Yeah, exactly, two and a half. That’s why it comes back to what you brought up before about the voluntary aspect of it. I guess I should get to what actually happened first. This was the appellate court. I’m trying to see if they upheld it or overturned.

NASIR: Yeah, upheld.

MATT: Okay. Surprisingly, what was held was that this employee did have to pay back the money to the employer which California employers get very few victories. They’re very few and far between. But this was a pretty surprising one and this is the appellate court so it made it through two different rounds here and that’s why I’m going to the voluntary aspect of it. I think, if it was involuntary and it was required, I don’t think they would have gotten to the same decision that they did.

NASIR: Yeah, and just to clarify, I mean, there has been cases in California that have dealt with this issue a little bit. There was one in the federal court – the federal court in California – and they still applied on California law. I think this is the most recent decision from an appellate level in California – just for the lawyers that are maybe listening, kind of getting education on that. But this is definitely significant. If you look at other states on how they’ve dealt with this, California has been one of those that, a lot of lawyers, when they draft these, they’ve always been kind of concerned if it’s being challenged and you really have to focus on how you draft it. But the same goes with these other states, too, because you can easily draft these types of what we call employee reimbursement agreements or training reimbursement agreements incorrectly in a way that’s not enforceable and one of the common mistakes is basically you make it a penalty that, if they leave early, they owe you this amount of money. This happens all the time. You have an employee, you spend all this time training them, and then they leave. That’s not quite what we’re talking about here and Matt made a good point to magnify the importance of the voluntary nature of this. But, also, there’s another component of the actual expenses So, even if it is voluntary, if there’s not actual expenses that the employer spent in order to train, then it’s going to be also hard to collect more than what the actual expenses were. Here, the estimated cost if over $46,000 per employee, yet they’re not asking for $46,000 – they’re asking for something less than that.

MATT: The agreement they had was they estimated $46,000 per employee but the most that somebody could pay was $30,000 so it wasn’t possible to get the full amount back so, basically, no matter what, the employer is saying, “You know, the idea is we’re going to train these people to do this higher level. They’re presumably going to get paid more and we’re going to make more off of it so we just kind of look at everything as a whole and think of it as a win.” I think this is a win on top of that, the fact that here’s what the court said: “Repayment of the fronted costs of a voluntarily undertaken educational program, the benefits of which transcend any specific employment and are readily transportable is not a restraint on employment.” So, going back to 16600 – that restraint language which is one of the more broad and ambiguous sections of code I can remember or I can recall off the top of my head. But, yeah, this is a win for California employers, for sure. But how much of a win is it? This is a pretty narrow scope, right? I mean, there’s a lot of different things. A lot of boxes have to be checked on this in order for this to work, I think, for the employer.

NASIR: Yeah, I think so. Also, how many times it’s going to actually come up in an actual situation is probably rare. I mean, $46,000 for training just seems… right? I mean, obviously, if you’re putting that much investment into one employee, those skills are going to be useful elsewhere and I think that’s the whole concept. “Look, I’m paying all this money and they’re going to just go across to a competitor and I’m kind of stuck with the bill. That’s not fair.”

MATT: Right.

NASIR: There’s also something in the FLSA – the Fair Labor and Standards Act, federal law – that may imply that, you know, this concept, let’s say they spent all this money, they’re getting paid their regular wage but then, a month later, they leave and now they owe all this money, one of the arguments they could have made – I don’t know if they made it in this deal – is that, well, if the employee does pay that back, then effectively they would have worked for less than minimum wage. I’m not sure if it was made in this case but there has been a case – this was actually that federal court case in 2010 in California where that argument was raised and, despite that, the court still ruled that the employee had to pay back that reimbursement.
Here’s another thing, another common mistake – sorry, I just remembered – another common mistake of these reimbursement agreements is that these employers will take it out of their final paycheck. In California, it’s a big issue. Some other states, you may be able to get away with that if you have it in writing and so forth but that’s another kind of touchy area as well.

MATT: Yes, and that was basically you running from one side of the court room to the other, arguing against yourself back and forth but that’s all good points.

NASIR: That’s true.

MATT: Either way, you win and you lose.

NASIR: I can’t remember if we talked about this but it also reminds me of liquidated damages clauses and – this is very specific – H1B worker contracts. Let me just break this down because it is relevant. So, you have these H1B visas which basically are work visas that employers sponsor. You have employees that come from overseas or from outside the country and you sponsor them but there’s some money and sometimes you pay for the attorney and sometimes you do this – all this kind of work to get that person here. The danger is you bring them here and, a month later, they quit, right? It’s like, “Okay, I spent all this time.” And so, a lot of people, what they do is they put these liquidated damages clause which aren’t dissimilar. I mean, this $30,000 issue, that’s exactly that – a liquidated damage clause basically saying that, if you terminate this contract early at this period, then you’re going to owe us this amount of money because that’s calculable to our expenses as what it’s going to be or whatever. In those cases, the courts have pretty much found something similar to these training cases that they’re pretty much tolerated. They have to be crafted properly. There are ways to mess up. But, generally, they’re acceptable.

MATT: I think you’re referring to Chamberlain V. Augustine, actually decided a hundred years ago.


MATT: 1916.

NASIR: Yeah, that’s exactly what I was referring to.

MATT: That was a sum of $5,000 as liquidated damages.

NASIR: I actually gave the oral argument in that case.

MATT: Yeah? Wow!

NASIR: Well, bottom line is, I mean, we get this question a lot, right? We have employees that we’ve trained. How do we make sure that they don’t leave and take their money with them?

MATT: I mean, to sum it up, I mentioned before all the different boxes that had to be checked. Just looking at this, it was a voluntary decision by the employees. It was educational benefits. The time period for kind of the payback was a defined time period. You know, that’s a lot of things to put in this sort of agreement. If you are going to do something like this, it’s got to be similar to those lines – at least according to this very fresh appellate decision that could be overturned. Who knows?

NASIR: Yeah.

MATT: I guess we’ll have to see but, for now, it’s take it while you can, I suppose.

NASIR: I think it’s the right decision. Even with that non-compete statute, I don’t think it was contemplated that the employers would be put in such a bad position. But who knows? In California, things can change overnight.

MATT: Oh, it’s just been overturned – just now.

NASIR: Oh, just in. I read it on Twitter in fact. It’s real-time. In fact, the judge actually is on Twitter. In fact, we found out even before the employer found out. That’s how he announced his ruling.

MATT: Unbelievable.

NASIR: This day and age, right? Everything’s changing.

MATT: Exactly.

NASIR: Well, I think that’s our episode for today but more non-compete stuff this week. I think that’s our theme this week, huh? Non-competes.

MATT: Yeah, President’s Day, non-compete. Two days after President’s Day, also non-compete.

NASIR: Yeah, our yearly tradition, actually.
All right, guys, thanks for joining us.

MATT: Yeah, keep it sound and keep it smart.

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Legally Sound | Smart Business covers the top business stories with a legal twist. Hosted by attorneys Nasir N. Pasha and Matt Staub of Pasha Law, Legally Sound | Smart Business is a podcast geared towards small business owners.

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